Service centers expect to see continued consolidation

While monthly factors might continue to fluctuate and force a variety of strategies and approaches during 2012, overall market conditions continue to make merger and acquisition (M&A) activity attractive for the service center sector.

A steadily improving economy, the easing of credit and renewed strength in the energy and transportation sectors are expected to contribute to an environment that will favor more M&As this year and for the foreseeable future, service center executives said. Furthermore, U.S. companies could begin to follow a European-style model in which mills adopt a strategy of acquiring service centers.

Those messages came though especially loud and clear during the Metals Service Center Institute (MSCI) Carbon Products Conference in Carlsbad, Calif., in February. The global carbon steel sector is expected to undergo another wave of consolidation as players of all sizes find themselves with more cash on hand and a desire to drive out fragmentation, industry leaders said.

Although M&A activity slowed to a trickle in many segments of the steel sector due to the recent economic crisis, opportunities are on the rise once again, particularly as steel players look to lock in raw material supplies or expand their margins with a push downstream, executives said.

Service center acquisitions have been on the rise in North America over the past couple of years, with more than 20 U.S. and Canadian centers bought each year, according to an AMM analysis. Some of the usual players were active in both 2010 and 2011, including MRC Global Inc., formerly known as McJunkin Red Man Holding Corp., Metals USA Inc., Namasco Corp., Reliance Steel & Aluminum Co., Ryerson Inc., Samuel, Son & Co. and Worthington Industries Inc. A number of last years transactions were bigger and potentially more influential than those made in 2010, contributing to the belief that such activity will continue.

I think the tendency to consolidate further is likely to continue in the U.S., said Michael H. Hoffman, vice chairman of Klöckner USA Holdings Inc., which made a number of key buys last year, such as distributors Macsteel Service Centers USA Inc., Newport Beach, Calif., and Brazils Frefer Group.

We . . . would be interested in further consolidation and we continue to look at acquisitions, and most of the larger service center groups in the United States to a larger or smaller extent will continue to do the same, he told attendees at the MSCI conference. Generally speaking, based on geography and product, we are likely to see increased (consolidation) activity as 2012, 2013, 2014 develop, and theres no question that will be helped by a steadily improving economy.

James D. Hoffman, senior vice president at Los Angeles-based Reliance Steel & Aluminum, agreed that M&A opportunities in the steel sector are picking up speed. Were going to continue to do what we do. There are some good companies out there that are becoming available. We think its healthy; we think its good for the industry, he said.

Reliance has logged its own wave of buys, including Continental Alloys & Services Inc., Houston, in August, and the company is eyeing a number of possibilities. Without giving away too many secrets, when you talk about growth inside of Reliance we dont have a strategy that says were going to buy X amount of companies. (But) if theres a good company out there thats available, well take a look and see how it goes, he said.

Smaller players also are mulling growth plans, as well as fending off interested bidders themselves.

Klein Steel (Service Inc.) is certainly still receiving calls from brokers. Well continue to do our part to make sure the industry is fragmented, John Batiste, president and chief executive officer of the Rochester, N.Y., company, quipped during an executive roundtable. But we are looking to do the sameon a smaller scale, of course, he said, noting that even for a more regional player the opportunities to grow are expanding. Certainly, companies are worth more today than they were back in late 2008. Multiples are changing. Its probably a decent time for that kind of activity to go on.

On the mill side, most M&As have been aimed at locking in inputs, like Nucor Corp.s 2008 acquisition of scrap supplier David J. Joseph Co. and AK Steel Corp.s recent iron ore and metallurgical coal announcements. But steelmakers next acquisitions might reflect a push into distribution, Klöckners Hoffman predicted. I think the producers will begin to play a bigger role in consolidation, he said, citing the European model of mills acquiring service centers. (That model) is likely to find more credibility in the United States than it has in the past.

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